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Queensland Mid-Year Fiscal and Economic Review 2018-19

The Queensland Mid-Year Fiscal and Economic Review 2017-18 has been released providing an update on the State's economic and fiscal position since the State Budget delivered in June of this year.  

Key points include:

  • The surplus has been revised upwards from $148 million to $524 million in 2018-19 and across the next two financial years due to favourable revisions in royalty and tax revenue;
  • Revenue and tax growth will be stronger in 2018-19. The revenue windfall in 2018-19 is $1.264 billion and is thanks to coal royalties revised up by $1.8 billion over the next 3 years;
  • Budget expenditure and employee related expenses will be growing faster than forecast in 2018-19. Expenses in 2018-19 are estimated to be $58.478 billion, $888 million higher than the Budget estimate;
  • Borrowings of $71.609 billion are projected at 30 June 2019 for Queensland's public sector, $738 million more than the 2018-19 Budget estimate and will rise across the forward estimates;
  • Infrastructure spend will rise to 2.9% of GSP in 2019-20 and is higher than the State Budget estimate in June 2018 (2.8%). It will then fall back to 2.5% by 2021-22; and
  • Economic forecasts are unchanged between the and the State Budget delivered in June 2018.

In summary,  the MYFER delivers an improvement in Queensland's budgetary position in 2018-19 and across the next two years through revenue windfalls mainly in the area of coal royalties. The warning though is that expenditure continues to ramp up with the additional revenue and through history we know that it can be very difficult to turn an expenditure tap off once on. I also note that public sector debt will continue to increase and if anything at a rate faster than was budgeted for back in June 2018.

I have provided below some graphs that I think best describe the main points to note.

 

Is Queensland out of step with our increasing public service headcount?

There has been a lot of talk this year about growth in public sector numbers in Queensland.  With the Mid-year Fiscal and Economic Review (MYFER) to be delivered this week QEAS takes a look at this important topic. 

This issue tends to focus on growth across years (longitudinal comparison).  We thought it might be interesting to compare public sector growth relative to other States and as a percentage of each State’s population to see what falls out. 

Findings from ABS data highlights:

  • Since 2007-08 Victoria (25.0%) has had the highest growth in State Government employees followed by Queensland (18.1%), Western Australia (13.9%), New South Wales (11.9%), South Australia (4.5%).  The average for all the States and Territories is 16.1%.
  • The majority of this growth for Queensland has occurred since 2014-15 (10.3%) and compares to Victoria's 9.1%
  • Higher population growth States like Victoria, Queensland and Western Australia have had higher growth in State Government employee numbers and vice versa for lower population growth States like South Australia.
  • States with bigger population bases such as New South Wales and Victoria are able to achieve economies of scale in the delivery of government services and accordingly have a lower ratio of State public Service employees to their population.  As is the case for States with a higher population density.

It is clear that public expectation on the effectiveness and efficiency of core government services such as health, education, public transport and law and order has profoundly influenced the Palaszczuk Government in respect to the number of State public service employees in Queensland.  However, so too has population density, population growth, economies of scale and to some extent political ideology.

All States have had an increasing public servant headcount but interestingly, with the exception of Victoria, all States over the past decade including Queensland have managed to confine these increases to less than or equal to the rate of increase for their respective population over the same period.

The warning though is this …. Queensland’s rapid increase in State public service employees as a percentage of population is now equivalent to what it was a decade ago.  Should the rate of growth that has occurred in the last several years continue we would join Victoria in being in the dubious position of letting our headcount grow by a higher percentage than population growth despite technology gains in service delivery.

The message in all this is for the State Government is to now taper off the growth and level peg it with population growth.  The MYFER to be delivered this week will be a timely opportunity to scrutinise the State Government’s performance in managing our State’s finances prudently.

Queensland's Domestic Economy - September Quarter 2018 Update

Latest ABS data confirms Queensland's domestic economic growth has now peaked and is falling away which has considerable implications for future employment growth in the Sunshine State.

In trend terms, our domestic economy grew by only 0.1 per cent in the September quarter and in seasonally adjusted terms it contracted by 0.4 per cent. This compares to 0.5 per cent growth and 0.3 per cent growth respectively for Australia's domestic economy.

Quarterly domestic economic growth for Queensland peaked in the December quarter 2017 following a strong two year period that generated considerable employment growth. However our domestic economic growth has progressively eased across 2018 which is now actively influencing our State's employment growth at present. In my opinion the absolute best lead indicator for employment growth in Queensland is State Final Demand.  

Despite moderate household and government consumption expenditure growth it was private capital expenditure that contracted heavily in the September quarter 2018 that has had a considerable negative impact on Queensland's domestic economic growth. No doubt the state of disarray in Canberra is to some extent causing many investment decisions to placed on hold.  This will unfortunately play out for at least another six months with the Coalition committing to run full-term and the next Federal election to be held in late May 2019.

​Finally next week sees both the Federal Government release its 'Mid-year Economic and Fiscal Outlook' and the Queensland Government release its 'Mid-year Fiscal and Economic Review'.  It will be interesting to see whether the Coalition makes any announcements ahead of the pulled forward - 2 April 2019 Federal Budget to try and get its floundering reelection stocks up.  In addition the Queensland Government, which rightly or wrongly has more accountability placed on it for the performance of the State economy, may be tempted to announce measures to get employment moving upwards again to drive down the Country's highest unemployment rate.  

Queensland's productivity continues to rise in 2017-18

QEAS has previously had a very close interest in Queensland productivity given the profound importance it has for the economy and living standards. Productivity measures the efficiency with which combined labour and capital inputs are transformed into product or service outputs which is called ‘multifactor productivity’ (productivity). I really like to think of productivity as doing more with the same or the same with less. 

Latest data by the Australian Bureau of Statistics reveals Queensland's productivity improvement continues with moderate positive growth of 0.8 per cent in 2017-18 and compares to national productivity growth over the same period of 0.5 per cent.

 

Queensland's multifactor productivity growth in 2017-18 of 0.8 per cent compares to the State's long-term average over the past two decades of 0.6 per cent.

This is good news as it means our economy is transforming inputs into outputs more efficiently and is producing more goods and services from the same quantity of labour, capital, land, energy and other resources.  This improved production efficiency will inevitably generate higher real incomes and lead to long-term improvements in our economy’s living standards for all Queenslanders to hopefully benefit from.

Finally growth in Queensland's output relies on a combination of labour, capital as well as productivity. The strong economic output growth recorded for Queensland in 2017-18 relied predominantly on hours worked but also in part on capital and productivity gains. Expressed another way it not just what we use to produce something it is how we do it.

 

 

Support for employees affected by domestic and family violence

On this White Ribbon Day - Any Queensland small business can access a free QEAS resource / template assisting them with the implementation of a "Support for employees affected by domestic and family violence" policy. This template can be accessed here

Queensland's Economic Performance 2017-18 in graphs

Queensland's Economic Performance 2017-18 in graphs ............

Does your business feel compelled to donate to the major political parties?

Does your business feel compelled to donate to the major political parties or attend a particular political party event?  If so, you’re not alone.

Recently the Grattan Institute studied political donations in Australia and confirmed what many know to be the case.  If you want to do business sometimes you feel obligated to reach deep into your pocket and hand over cash to the major political parties.

Is it necessary? Well in theory no it is not, yet so many businesses across Queensland feel it to be a must. This grey area is discussed in detail in the Grattan report and four key points can be discerned:

  • Queenslanders and Australians are concerned about the power of special interest groups;
  • Groups with the most to gain contribute more and accordingly get more access;
  • Relationships with politicians matter and can be bought through donations or attending functions; and
  • Access can lead to influence.

Key quotes from the report include:

"Australians are rightly concerned about the role of special interests in politics. Even a healthy democracy like Australia’s can be vulnerable to policy capture. Well-resourced interests – such as big business, unions and not-for-profits – use money, resources and relationships to influence policy to serve their interests, at times at the expense of the public interest. Even if they are only sometimes successful, it’s not the ‘fair go’ Australians expect.

Access to decision makers is vital for anyone seeking to influence policy. But some groups get more access than others. Businesses with the most at stake in government decisions lobby harder and get more meetings with senior ministers.

Money and relationships can boost access: time with ministers and their shadows is explicitly ‘for sale’ at fundraising dinners, and major donors are more likely to get a meeting with a senior minister. And more than one-quarter of politicians go on to post-politics jobs for special interests, where their relationships can help open doors.

Donations build relationships and a sense of reciprocity. And the fact that industries in the cross-hairs of policy debate sometimes donate generously and then withdraw once the debate has moved on suggests they believe, perhaps rightly, that money matters."

I do not necessarily agree with everything in the Grattan report but it certainly makes for compelling reading. The report can be found here

NSW fires latest salvo in tax competitiveness war

Competition is a beautiful and ruthless concept.  It is a situation in which two or more people or groups are trying to get something which not everyone can have.  In the business world this is predominantly market share. For State Governments competition is better known as competitive federalism whereby each State Government is in fierce competition with each other to retain and attract business investment or people to their state.

The main area in which State Government’s compete is to have the most attractive business operating environment determined by both tax and regulatory settings. This week New South Wales Government have launched the latest salvo in the tax competitiveness war in adjusting their stamp duty arrangements. 

NSW Treasurer Dominic Perrottet has announced that current stamp duty brackets will be indexed at CPI for all property transactions. NSW will be the first state or territory in Australia to index Stamp Duty brackets to CPI and it represents the first major change to stamp duty in over 30 years. Under the changes the price bands, or brackets, which determine how much stamp duty is paid will start to rise with inflation from the middle of next year. Transfer duty is charged at various rates on the transfer of real and business property with rates for both NSW and Queensland below.

The tax reform will cost the state budget about $185 million in the three years after the changes take effect on July 1 next year. The indexation of rates will give buyers modest savings initially but will, over time, ensure no repeat of the current situation where stamp duty is a barrier for first home buyers, up sizers and right sizers.  It will ensure that the stamp duty cost for commercial properties will also be moderated encouraging investment and market mobility. To illustrate, Mr Perrottet said that if the state’s stamp duty brackets had been indexed when they were introduced in 1986 someone purchasing a $1 million property today would pay around $80,000 less in stamp duty.

The reason QEAS has covered this development is that unless Queensland matches this initiative in our 2019-20 State Budget, investors may look to NSW as a more attractive jurisdiction, thereby threatening Queensland investment.  The pressure will be on Treasurer Jackie Trad to consider this latest development.

Key points:

  • NSW Stamp Duty Brackets will be indexed at CPI
  • https://cdn2.hubspot.net/hub/2095495/hubfs/PropertyCouncil-July2017/Images/clear.gif?t=1541459447104&width=1&height=1&name=clear.gifThis change will apply to all property transactions in NSW
  • First major change to stamp duty in 30 years
  • Will affect transactions made on or after 1 July 2019.

Anticipating Queensland’s Future Skill Needs

Jobs Queensland have released a very interesting report ‘Anticipating Future Skills: Jobs growth and alternative futures for Queensland to 2022.

It provides an evidence base for consideration of Queensland’s future skills needs that has been developed in consultation with industries and regions across Queensland.

More than 50 per cent of all new workers are projected to be employed in just three industries: Health Care and Social Assistance; Professional, Scientific and Technical Services; and Education and Training.

This reflects a continuation of a trend towards high levels of growth in service based industries and the occupations that underpin these industries. This project also provides projections of future qualifications in the Queensland labour market.  The workforce is projected to become more educated, with a clear shift towards higher levels of skill acquisition.

These projections can play a key role in informing decision making by government in VET investment, and skills and training policy more broadly. The outcomes from this project can also support industries and regions to consider and plan for the future workforce needs within their domains.

QEAS notes the baseline scenario which includes assumptions about the economy, the labour market and population and productivity growth, developed around the Queensland Government’s 2017–18 Budget Papers and other state government data.

Key results under the baseline scenario include:

·       It is projected that more than 50 per cent of all new workers will be employed in just three industries — Health Care and Social Assistance; Professional, Scientific and Technical Services; and Education and Training. 

·       Regions with the highest proportion of service industries are projected to see the greatest growth in employment, with the majority of growth in the south east corner. 

·       Professionals will remain the largest occupational grouping and are projected to grow strongly, as is the Community and Personal Service Workers group.

·       Under the baseline scenario, the Queensland employment is projected to grow by almost 190,000 jobs between 2017 and 2022, resulting in almost 2.6 million persons employed.

·       Growth in industry employment is varied. Employment in Health Care and Social Assistance is projected to grow strongly over the five years to 2021–22 and is projected to remain the largest employer, increasing its share of Queensland employment from 13 per cent in  2016–17 to 14.5 per cent in 2021–22.   

·       Employment in Information, Media and Telecommunications is projected to fall over the five years to 2021–22.

A link to the report is provided here.

Why is infrastructure so challenging for Queensland

Infrastructure plays a crucial role in determining the strength of current and future economic growth in Queensland. However the roll out of infrastructure ahead of or even on the curve of requirement has proved profoundly challenging for all three tiers of government and successive governments.

There are three main reasons for this: higher economic growth; higher population growth; coupled with a significantly greater geographical area and decentralised population and economy. QEAS takes a look at these drivers.

Queensland has undoubtedly been one of Australia’s success stories in terms of its economic growth only being surpassed by Western Australia over the past 25 years.  Queensland’s gross state product has grown by nearly 170 per cent to now be a $327 billion economy in 2016-17 prices.  This compares to national growth over the same period of 125 per cent.  Growth in recent years for the Sunshine State has been somewhat subdued but Queensland Government estimates have growth increasing from 1.8 per cent in 2016-17 to 2.75 per cent in 2017-18 and 3.0 per cent in 2018-19.  Whilst these forecasts remain under the 25 year long term average of 4 per cent (3.3 per cent nationally) the anticipated economic growth will require continuing higher levels of infrastructure renewal and capacity than at present.

Over the past 25 years Queensland’s population growth has grown by 63 per cent significantly above the national rate of 40.7 per cent and has been the highest of all States. Population flows towards economic and employment opportunity and as our economy has grown generating jobs our population has swelled. Furthermore forecasted population over the next 25 years indicates that Queensland’s population will continue to grow well above the national average giving rise to continuing higher levels of infrastructure investment.  Depending upon growth scenario (Series A: high and Series B: moderate) ABS estimates Queensland’s population to grow by between 48.1 to 62.5 per cent and compares to the national average of between 39.9 to 50.8 per cent.

The third reason why infrastructure has proved so challenging for Queensland relates to the geographic size of our State coupled with our decentralised population and resulting lower population densities.  The size of the challenge for the three tiers of Government is evidenced in the following table.  In short the land area, regional populations, road network, rail network, number of airports, number of ports, dams, water pipelines, water treatment plants and length of transmission and distribution electricity networks necessitate a significant and higher level of investment historically, currently and into the future.

In summary, in order for the Sunshine State to continue to grow and prosper unhindered, it will be essential that not only new infrastructure investment occurs but better cooperation, planning, construction and maintenance also occurs across all three tiers of government.

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